While the prospects for the UK economy have been uncertain over the last few years, house price growth has remained positive. This continues the overall upward trend which, the financial crisis aside, has been present for over two decades.
In the long run, further house price growth could be ahead. A lack of supply versus demand, as well as continued low interest rates, may mean that house prices in the UK continue to move higher despite being relatively expensive when compared to average incomes.
As such, many investors may be considering a buy-to-let. Here’s why that could be a sub-optimal means of accessing continued house price growth, and why investing in listed property-related companies could be a better idea.
Tax efficiency
Buying shares through an ISA or a SIPP offers greater tax benefits than a buy-to-let. Capital gains tax and dividend tax are not levied on capital within an ISA or a SIPP, which could save an investor significant sums of money over the long run.
In contrast, buy-to-let investment is becoming increasingly subject to tax, with a 3% stamp duty surcharge being levied on second home purchases. Likewise, the ability to deduct mortgage interest payments from rental income before paying tax is being restricted.
Valuations
As mentioned, two decades of house price growth means that property is expensive when compared to average incomes. This could mean that there is a slowdown in house price growth in the near term, which could limit the total returns that are available from a buy-to-let over the next couple of years.
In contrast, a number of housebuilders, REITs and property-investment companies trade at significant discounts to their intrinsic values. In many cases, their performance in recent quarters has been strong, which suggests that they are perhaps more resilient than investors are factoring in. Their valuations suggest that while house prices may not be cheap, it is possible to gain exposure to house price growth through stocks that are, in some cases, potential bargains when compared to the wider stock market.
Risk
With many individuals who undertake buy-to-let investments having limited capital, they often end up with a small number of homes in their portfolio. This can mean that they have relatively high risk, since economic challenges in a particular town, for example, may mean that they experience significant void periods, or a lack of rental income.
In contrast, buying listed property companies provides a significant amount of diversification for an investor. It is possible to buy a number of housebuilders, REITs and other property-related stocks within a portfolio, with each company itself often having exposure to a number of different regions. This could push the risk/reward ratio further into an investor’s favour, and may mean that they experience lower volatility over the medium term.
Therefore, while house price growth over the long run may be appealing, accessing it through listed companies, rather than a buy-to-let, could be a better means of generating high returns.